Revenue shortfall casts a long shadow

While the acknowledgment that tax collections for the year have fallen some $230 million short of projections sparked anew the debate over whether the state can afford any of the proposed tax cuts, the revenue shortfall casts an even greater and longer range shadow over the state’s fiscal condition.

If falling below initial income estimates continues, it raises the prospect that adjustments --- that is to say, cuts --- may be necessary to keep the current budget in balance and force a re-examination of the budget scheduled to go into effect July 1.

When Gov. Chris Christie presented the fiscal 2013 budget to the Legislature in February, its proposed spending as well as his call for a 10 per cent reduction in income tax rates was based on seven per cent economic growth, a number viewed by many as overly optimistic and probably out of reach.

The April shortfall and the growth rate of just over two per cent would seem to validate those concerns. The pace of economic recovery nationally has been excruciatingly slow and it appears that any rebound significant enough to reach the growth rate hoped for by Christie is well into the future.

The Administration responded to the shortfall announcement by cautioning against using one month’s collections to draw a larger and possibly skewed picture while pointing out that two months’ worth of tax collections remain in the current fiscal year and it would be prudent to wait until those results can be factored in.

Fair points, to be sure, but it is highly unlikely that May and June revenues will experience a surge great enough to overcome the April shortfall.

The below expected revenue figures were released by the Department of the Treasury a week after the Office of Legislative Services --- the nonpartisan research arm of the Legislature --- warned of an impending shortfall and said it would provide hard numbers later.

Both the Governor and Senate President Steve Sweeney, though, remain committed to a tax cut in 2013. The two had scheduled a news conference early in the week to announce a compromise plan, but it was abruptly canceled minutes before its planned start after Sweeney’s office said he would be unable to attend because of a personal --- but minor --- health issue.

The whirring sound rising from the Statehouse was reporters’ antennae going up in the wake of the cancellation. It took reporters about five minutes to sniff out the story that Sweeney had not informed his leadership team or veteran and influential Democratic Senators about his back channel negotiations with the Governor nor about the details of the compromise the two had reached.

According to news reports, the compromise essentially adopted Sweeney’s proposal to provide a credit against personal income taxes tied to the amount of individual property taxes paid. The Governor abandoned his tax rate cut proposal, but succeeded in raising the income eligibility limit to $400,000 to qualify for the credit.

Sweeney’s failure to keep his leadership informed of his actions was a strategic --- if not amateurish --- political misstep. He seemed to allow his zeal for reaching an agreement with the Governor to nullify the overriding need to assure and maintain unanimity of support among his own membership.

He had achieved nearly every element in his proposal only to see it evaporate under threat of public criticism from his disgruntled colleagues.

Sweeney did not consult with the Democratic leadership in the Assembly, either, even though the lower house leadership has been actively pursuing its version of a tax cut proposal including reinstatement of a surcharge on income taxes of wealthy New Jerseyans --- the so-called millionaire’s tax.

Sweeney has bluntly rejected the surcharge reinstatement as a deal breaker, recognizing that the Governor has vetoed it twice before and has promised to do so again while characterizing Democrats as tax raisers and obstructionists on tax relief. It would clearly be a losing hand for Democrats.

The disappointing revenue numbers may have turned the debate over tax cuts into an academic exercise. While there remains support for a cut, a number of legislators have suggested action be delayed until a clearer picture emerges of the state’s revenue situation.

Even though the tax cut plan would cost approximately $180 million in the first year of its three-year phase in, there exists a concern that in the absence of far greater robust economic growth the state would be unable to absorb the ultimate cost in excess of $1 billion.

While cutting taxes has always been an appealing thought to administrations and legislators, it is tempered somewhat by the politically distasteful and risky possibility that reductions in spending for other programs will be necessary to pay for them.

No one is eager to opening oneself up to charges that cuts in municipal or school aid or for social service programs were implemented to pay for tax cuts for the rich.

While the most immediate impact of the lower than anticipated revenues will be felt in the tax cut debate, of greater concern is the trend indicating continued and persistent slow economic growth.

Christie, by tying his spending and tax cut plans to an unusually high growth figure, gambled that the economic recovery would accelerate and New Jersey would reap the benefit of it, clearing the way for a tax cut heading into the 2013 legislative and gubernatorial election year.

It still might happen, but it would be prudent for all concerned to hedge their bets some.
Carl Golden is a senior contributing analyst with the William J. Hughes Center for Public Policy at Richard Stockton College.